When you have no credit score and you are working to build up a good credit score then it looks like a challenging task. In the initial stages when you get a loan and you start repaying the loan, you will also start building your first credit score points. Once you have built up several months of timely payment of your dues. Your creditors report your payments to credit bureaus and you should build a fair decent credit score.
It does not take a long time to build a credit history.
Credit bureaus will consider three months to six months of credit activity and start updating the credit report.
The fastest way to build a credit score is to get a credit card and start using it and repay the outstanding balance on time.
If you have a very thin credit score you will have a credit card with a very small credit limit and in some cases, an unsecured credit card is not issued due to insufficient credit score.
What if you do not qualify for an unsecured credit card?
Suppose if you do not qualify for an unsecured credit card, you can apply for a secured credit card. A secured credit card requires a security deposit and it gets easily approved. You can build credit score quickly when you have a low credit score. Credit cards can help you to build credit score faster as your information is often reported to credit bureaus.
Building a good credit score
If you make purchases using the credit card then each month you also pay your credit card bill then your card issuers report this information to the credit bureaus. Credit bureaus update these details creating a credit score.
Each time you should make credit card payment within the due date and maintain outstanding balance below 30% of your available credit. By doing this you will create positive information for your credit report.
To accrue enough information on credit score it takes three to six months.
What are the ways to build a credit score?
You can increase your credit score by diversifying credit. There are several ways through which you can diversify your credit. That includes revolving credit, installment credit, secured credit and unsecured credit.
Revolving credit
The most common form of revolving credit system is a credit card. You can borrow money within the credit limit. You are responsible for paying back your debt at the end of each month. This process keeps on revolving and it keeps your credit score always up to date.
Installment credit
There are certain credit agreements that have fixed payments for a certain amount up to a period of time. You can borrow a certain amount of money and keep paying until a certain period of time.
Secured Credit
In secured credit, the lender holds the collateral as lien and issues a loan. Pay your loan repayments on time and increase your credit score. If you fail to pay off the loan you are certain to lose your collateral and this will also affect your credit score.
Secured credit cards are a good option for people who are having bad credit or no credit. The lenders hold some collateral or financial incentive before issuing a credit card.
Unsecured Credit
Unsecured credit does not require any collateral. It is a standard credit card that will be issued under unsecured credit. The lender allows you to borrow money and it is only issued on word of trust that you will pay back the debt. Once you start paying back debt on time you will build a good credit score.
Click here to know 5 Myths about Credit Score
Why should you maintain a good credit score?
Maintaining a good credit score ensures that you get
- Low-interest rates on loans and credit cards
- Increasing chances of loan approvals
- Higher negotiation power
- Increase in credit limits
- Easy approval of mortgage loans and many other benefits.
Click here to know Credit Scoring and where it is headed
Conclusion
There is no predefined time limit that can be ensured to increase a good credit score. The thumb rule is to use your loans and credit cards promptly and make payments on time responsibly. An increase in credit score will not happen overnight. It typically takes time, as you keep on paying your dues you create a positive track record and one day it will eventually build a good credit score.